What Is an Enclave Economy?

by Eric Dontigney; Updated September 26, 2017

The term “enclave economy” refers to the development of, for example, a business sector in a localized region that shows profound differences from the surrounding areas and economy. The enclave may also show substantial cultural differences from the surrounding culture.

Features

An enclave economy typically develops when foreign investors – all operating in a similar industry – invest heavily in a specific region with the intent of manufacturing products for export. The Jalisco state in Mexico, for example, became the home of a high-tech enclave economy after heavy investment from U.S. technology companies. Enclave economies typically show high employment, superior wages and high-end technology. Domestic enclave economies develop around industries, such as San Francisco Bay Area’s Silicon Valley, or through concentrations of ethnic minorities.

Pitfalls

Governments that encourage enclave economies, particularly those driven by foreign investment, often hope for a boost to the rest of the economy and domestic development courtesy of foreign investment and expertise. In practice, the economic boost and development of domestic infrastructure often fails to materialize. The foreign companies frequently kill domestic companies either by driving up prices of domestic raw materials or importing raw materials, both of which make it impossible for domestic companies to compete. Foreign companies also soak up the skilled labor pool. The profits from those economic enclaves also return to the foreign investors’ home countries, which minimizes any economic gains for the host country.